Sunday, August 04, 2013

Chapter Nine: Endogenous "Green" Preferences

How did Al Gore become "Al Gore"?   When you meet an environmentalist, what role has recent events, peers, early schooling,  macro events,  family and other factors played in shaping this person's priorities?  Much of the environmental movement focuses on influencing young people to "act locally but think globally".   Economists who acknowledge the importance of heterogeneity in tastes and skills have a duty to think about why such diversity exists.

In Chapter Nine of my new Fundamentals of Environmental Economics, I discuss a topic that no other environmental or urban econ book ever bothers to discuss.  Where do "green" preferences come from?  Why is this an important topic?  Recently in a series of papers, Matt Kotchen has emphasized the importance of "voluntary restraint".  Individuals with such preferences lose utility from polluting.  This is like an internal pollution tax.   If there were a large subset of the population who don't need to face pollution taxes, to "do the right thing" then we would face fewer externality challenges when we don't introduce pollution taxes.  

In Chapter 9, I first sketch my work documenting that liberal/environmentalists engage in voluntary restraint.  I then discuss how places such as Berkeley, California that due to migration selection effects (and perhaps some treatment effects) are filled with such liberal/environmentalists can play a key "green guinea pig" role in greening our economy.

I then introduce two formal economies to teach some economic algebra.

1.  In economy #1, I discuss endogenous innovation and sketch the intuition behind Acemoglu and Linn's 2004 QJE paper.    There is a new product called a fuel efficient car.  The product currently does not exist.  There is a large upfront fixed cost $F to design such a car and there may be a positive probability that the research will fail and thus there is no car.    Since there are a group of Berkeley consumers who are willing to pay a price premium for a green car, the car makers may make this first Prius. If there are enough Berkeley people then there is sufficient profit to encourage this new variety to be produced.

2.  In economy #2;  I sketch Jerry Hausman's old puzzle about energy efficient products being expensive to purchase but cheap to operate (because they are more energy efficient).  I discuss new financing arrangements to reduce the upfront expenditure to make these products more attractive to buy to more people.

The chapter ends with some discussion of social preferences.  In the case of solar panels and the Prius that we use these in public and that people who want to signal that they are "good people" may buy these products to impress their friends.  Such a social multiplier offers social benefits if the total carbon externality shrinks as more people buy such products.

So, the chapter is stronger on analyzing the consequences of environmentalism rather on definitively answering what are the main causes of environmentalism.  In my own work, I have argued that education is a key driver of environmentalism.  

Not a bad chapter for a $2 book!!